The rally in the bond and mortgage markets is continuing this morning.  Europe stock markets are weaker and U.S. equity markets are set to open lower at 930am.  December Personal Income and Spending at 830am was in line with estimates; income up 0.5% against estimates of +0.4%.  December spending was unchanged against estimates of +0.1%; more evidence that holiday shopping didn’t meet those early lofty estimates.  Spending stalled in December as Americans used a jump in incomes to restore depleted savings, indicating the biggest part of the economy will not be a driver of the expansion. 

Last week Greek officials were “confident” that they could make a deal with creditors to fend off another debt default cliff.  Nothing happened.  Not necessarily a surprise as we have been subjected to the continual uncertainty and lack of progress for two plus years now.  Greece signaled opposition to economic oversight in exchange for aid, taking Italian interest rates higher this morning and driving equity markets lower.  European Union (EU) leaders gather in Brussels today for their first summit of 2012 to put the finishing touches on a German-led deficit-control treaty and endorse a 500 billion-euro ($661 billion) rescue fund to be set up this year.  Greece and its private creditors said Saturday they expect to complete a deal in coming days after bondholders signaled they would accept a bigger cut in their debt holdings.  It never ends. 

The DJIA opened down -100; 10-Year Note up +17/32 at 1.83% (-7 bps) and MBS 30-Year prices up +6/32 (.18 bps). 

This week’s elephant is the January Employment Report on Friday.  Current estimates are an increase of 160K non-farm jobs and private non-farm jobs up +170K with the unemployment rate at 8.5%.  The actual unemployment rate is closer to 16% however, the “official” rate is 8.5% is evidence that many have simply dropped out of looking for jobs.  Until the Federal Reserve revised estimates for growth downward for 2012 and 2013 last week and Q4 GDP advance report was weaker than forecasts (up +2.8% against +3.1% expected) there was an increasing belief the economy was gaining a little momentum.  Now economic bulls are re-thinking that idea.

The bellwether 10-Year Note is working on a key resistance level at 1.80% this morning.  In early trade it dropped to 1.82% and at 1000am was sitting at 1.83%.  The MBS’s are pushing into new highs in prices not seen in over a year.  The Federal Reserve’s decision to leave the FF rate at 0.0% for the next three years and with no inflation now or on the horizon, the long end of the curve is seeing buying as investors seek yield.  The safety trade over Europe’s debt crisis has ebbed recently but still plays a role in the decline in rates.

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Before 830am the treasury markets were trading slightly weaker and stock indexes a little better, it changed after the 830am release of Q4 GDP which anticipated a growth rate of 3.1% and reported +2.8%; the 10-Year Note bounced up a little and mortgage prices improved and stock indexes declined.  The report is the first of three over the next three months and usually gets revised when the preliminary report hits next month.  Nevertheless after the Federal Reserve released its weaker forecasts for growth in 2012, and 2013 on Wednesday the softer Q4 growth is getting a lot of attention this morning.  If inventory builds are removed GDP was up just 0.8%.  For all of 2012 growth up 1.7% compared with +3.0% in 2010.  Consumer spending in Q4 was up 2.0%, economists were projecting +2.4%, Q3 up 1.7%…holiday shopping was less than estimates. Q4 savings rate declined to +3.7%, the lowest in years.

 The bond and mortgage markets rallied a little on the 830am weaker GDP data.  MBS trading was volatile with prices swinging from +.22 bps to +.09 bps; at 915am +.09 bps with the 10-Year Treasury +4/32 at 1.93% -1 bps.   At 930am the DJIA opened down -36, the 10-Year Note up +6/32 to 1.92% (-2 bps) and mortgage prices +3/32 (.09 bps).

 The final data this week at 955am, the University of Michigan Consumer Sentiment Index,expected at 74.0, as reported 75.0, up from 69.9 at the end of December.  Current conditions at 84.2, expectations at 69.1 from 68.4 two weeks ago, 12-month outlook 82 from 79 two weeks ago.  The sentiment and current conditions are the highest since February 2011.  There was no reaction to the data in either stock indexes of the bond markets.

 European Union Economic and Monetary Affairs Commissioner Olli Rehn said authorities are “very close” to reaching an agreementon a private-sector involvement in a Greek debt swap this month.  Greece and its creditors are haggling over the terms of an accord to reduce the country’s borrowings, three months after private bondholders agreed to a 50% cut in the face value of more than 200 billion euros ($263B) of debt by voluntarily swapping bonds for new securities.  Earlier this week officials were saying a deal would be resolved by today, now the talk is “in the next three days”.

 Technicals are looking more bullish,the 10-Year Note has more to go before it runs into resistance.  The rest of the day the bond and mortgage markets will take their lead from the equity markets, stock indexes at 1000am at their worst of the day so far.

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The bond and mortgage markets opened better this morning,still reacting to the Federal Reserve’s surprise yesterday saying the FF rate would stay at 0.00% to 0.25%, clear out to the end of 2014.  Prior to yesterday the Federal Reserve was saying mid-2013.  The motivation is that the central bank has lowered its forecasts for U.S. growth this year and next.  Bernanke apparently is more concerned about growth that he was six weeks ago.  The recovery seen so far he considers anemic with unemployment to remain high for another two years, the housing sector showing little in the way of stabilizing let alone improving much, and he is very likely believing Europe will decline into another recession and that there will be defaults on a lot of the debt piled up.

 The reaction to yesterday’s FOMC Statement and Bernanke’s press conference was swift;U.S. Treasuries that were looking weak rallied taking the 10-Year Note to 2.00%, down -6 bp yesterday on the close, but at 1.92% on the initial reaction.  MBS prices spiked initially then backed off but still a very nice close, up +16/32 (.50 bps).  This morning treasuries are better as are MBS prices; at 900am the 10-Year Note at 1.98% (-2 bps) and MBS prices up +8/32 (.25 bps).  U.S. stock indexes at 900am: DJIA up +65; all major equity markets in Europe rallying on the Federal Reserve’s rate surprise.  At 930am the DJIA opened up +44, the 10-Year Note up +12/32 to 1.96% (-4 bps) and MBSs up +10/32 (.31 bps).

 At 830am Weekly Jobless Claimswere in line with forecasts, up +21K to 377K; Continuing Claims up +88K to 3.554 mil.  December Durable Goods Orders were much stronger than estimates.  Expectations were for an increase of 2.2%, reported up 3.0%.  The more significant excluding transportation orders were expected up 0.7%, reported up 2.1%.  November Orders were revised higher, from 3.8% to +4.3%, excluding transportation from 0.3% to +05%.  The two reports added a little more strength to the stock indexes in the futures markets.

More data at 1000am December New Home Sales were expected to increase 1.5% to 320K annualized units, actually declined 2.2% to 307K.  Based on sales there is a 6.1 month supply and for all of 2011 sales were down 6.2%.  December Leading Economic Indicators were expected to be up +0.7%, reported up +0.4%, November revised to up +0.2% from +0.5%.  No immediate reaction to the data.

 This afternoon at 100pm the Treasury will complete its auctions with $29B of 7-Year Notes.  Yesterday’s 5-Year Note auction met with solid demand. 

 The slightly bearish bias in the bond and MBS markets turned quickly yesterday on the Federal Reserve’s announcement.  Prior to the announcement we were thinking the 10-Year Note would climb to 2.15% but go no further; the highest it got was 2.09% on Tuesday.  Now the obvious questionis, how low will the 10-Year Note yield go based primarily on the Fed holding the FF rate at current lows until the end of 2014 and how low willmortgage rates go now?  It is unlikely U.S. interest rates will decline to new lows.  At this point we expect the wider trading range will continue with the possible low on the 10-Year Note at 1.80% and mortgage rates tied to a 25 basis point range in rates.  The Federal reserve is worried about the U.S. recovery and that Europe will continue to decline with eventual debt defaults in Greece and other EU countries.  Until there is another Europe shock it is unlikely that U.S. rates will push to new lows.  It will take a few days for traders and investors to assess the message sent yesterday from the Federal Reserve when the Committee made such an unusual move.

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The market opened generally quiet early this morning with treasuries and mortgage markets flat and stock indexes mixed at 900am.  U.S. financial markets will not see much change this morning ahead of the 200pm Federal Open Market Committee (FOMC) Policy Statement and Bernanke’s press conference.  The NASDAQ is the only index trading higher this morning, driven by the rally in Apple.

 There are no changes or improvements over Europe’s debt mess.  Greece is on the front burner now.  On Monday there was widespread belief that Greece and its creditors would make a deal and avoid defaults.  Yesterday the optimism waned as private investors (banks) refused to take the losses necessary to save the country.  Today the ECB said it would not participate in any write-downs on the Greek bonds it holds, saying the central bank isn’t an investor, it bought the debt to aid Greece in an attempt to avoid default.  To sum things up, nothing is being accomplished with Greece.  International Monetary Fund Managing Director Christine Lagarde said today that European governments and other public holders of Greek debt may have to increase support if private creditors don’t go far enough.  Investors and European finance ministers remain at odds over how much private investors should shoulder in the Greek bailout.

 The U.S. bond and equity markets have largely become desensitized about momentary events and comments out of Europe.  There is a slowly increasing belief in U.S. markets that eventually Europe will save itself and its currency; likely driven by the view that anything short of some acceptable plan would be a catastrophe to Europe and rest of the global economies.  Safety moves into U.S. treasuries have ebbed and at the moment there is little motivation to move into treasuries, yet so far there is not much reason the dump fixed rate treasuries.  The 10-Year Note yield has increased from 1.85% on 1/13/12 to 2.06% yesterday, mostly traders reducing exposure.  MBSs also have increased in rate.  Although rates have increased some as we noted they would, at the same time we do not expect interest rates to move much higher; our target for the bellwether 10-Year Note is 2.15% and no higher, worse case for mortgage rates, another 10 basis points in rates on 30-Year Notes.

 Working against the bond market, less concern over Europe and improved U.S. economic outlook.  Almost all the key economic reports in the past three months have beaten estimates.  On Friday the Commerce will release the advance Q4 GDP and the consensus is +3.1%, up frm +1.8% in Q3.  While the Fed will continue to keep short rates low as it has said repeatedly, the long end of the curve (10-Year Note) has seen its lows.  There is an idea out there that the Fed may decide to increase its purchases on MBSs in an attempt to keep mortgage rates low, but if treasuries increase also, about all that can be expected is the yield spread between MBSs and treasuries will narrow.  It is not likely that treasury rates would increase while mortgage rates fall.

 At 1000am, a few minutes ago December Pending Home Sales(contracts signed but not closed) was expected down 1.0%, fell 3.5% with about a third of sales not going to the closing table; Year-to-Year Pending Sales were up 5.6%.  November FHFA Housing Price Index expected down -0.1%, jumped 1.0%; -Year-to-Year was down -1.8%.  There was no market reaction to the two housing reports.

 U.S. rate markets will likely stay quiet through the morning and early afternoon ahead of the FOMC statement and Bernanke’s press conference this afternoon.  At 930am the DJIA opened down -45, the 10-Year Note was unchanged and mortgage prices opened unchanged to slightly lower.

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Treasuries and MBSs opened a little better this morning, ending days of price declines.  The equity markets were trading lower early, implying a weak open.  There are no economic reports today, just the $35B 2-Year Note Auction.  Last month’s 2-Year, 5-Year and 7-Year Note Auctions were well bid however the 3-Year, 10-Year, and 30-Year Auctions didn’t get the demand traders were expecting.  Now with rates a little higher, demand will likely be better.  The 2-Year Note has been unchanged for the last few weeks at 0.24% and that is likely where the bid will be this afternoon at 100pm.

This evening the President will deliver his State of the Union address.  Being an election year the address will carry political overtones and not likely to generate much interest in the financial markets.  He will lay out what he calls a “blueprint” for revitalizing the economy, emphasizing a rebirth for U.S. manufacturing, bolstering domestic energy production and training workers.  The FOMC Meeting begins today, concluding tomorrow with the policy statement and Bernanke’s press conference after the meeting.  There’s speculation that the Fed will launch another quantitative easing move.  Every time the FOMC meets the idea surfaces.  With the Q4 GDP expected up 3.1% on Friday, almost doubling the growth in Q3, there isn’t much rationale for another easing unless it is targeted to purchasing more MBSs to keep mortgage rates from increasing.

In the never-ending soap opera known as Europe’s debt problems,yesterday markets were buoyed by reports out of Greece that talks were going well to arrive at a plan to forestall a Greek default.  Today there’s not much optimism with a stalemate between regional policy makers and Greek bondholders over how to resolve the nation’s debt crisis.  Bond holders are not willing to take the huge haircut demanded.  European finance ministers balked at putting up more public money for Greece, calling on bondholders to provide greater debt relief.  Europe’s equity markets are weaker today, leading the U.S. market lower this morning.  The saga continues: On the positive side Spain’s 2-Year Note fell 5 bps to 3.12% as the government sold 2.51 billion euros ($3.3B of 3-Year and 6-Month Bills, meeting the maximum target for the sale.

At 930am the DJIA opened down -67, the 10-Year Note at 2.05% was unchanged but MBS prices rose +6/32 (.18 bp).  Prior to 930am the 10-Year Note held a 5/32 gain with its yield at 2.04%. 

Although the mortgage market is trading better this morning, the bellwether 10-Year Note is still struggling.  Even with equity markets weaker the 10-Year Note is not moving up in price.  Technically the 10-Year Note is slightly bearish on the near term outlook.  While we continue our outlook that rates won’t increase much unless there is renewed safety buying on news out of Europe, there isn’t any motivation to drive rates back down.  Given two years of fumbling and meetings in Europe to resolve debt issues, U.S. markets will remain vulnerable to any significant news from the region.  Presently markets are not as fearful of defaults or bank failures alleviating the need to park money in U.S. treasuries…the key word is “presently”.

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It wasn’t a good last week in the bond and mortgage markets withinterest rates up on increasing optimism that the U.S. economy can improve even in the face of Europe’s slide, and reduced need for safety in U.S. treasuries.  The 10-Year Note yield increased 15 bps last week and mortgage rates were up 8 basis points.  This morning early prices continue to fall as early activity pointed to a better open in the equity market.  At 830am the 10-Year Note was at 2.06%, up 3 bps from Friday’s close.  MBS prices at 830am were down -5/32 (.15 bp).  At 930am the DJIA was expected to open a little better, opened down a fraction (-8), the 10-Year Note traded at 2.07% -14/32 (-4 bps) and mortgage prices were dowm -8/32 (.25 bp).

There are no economic releases this week until Wednesday.  The week is focused on the Federal Reserve Open Market Committee (FOMC) meeting that starts Tuesday and ends Wednesday with the policy statement.  The Treasury will auction its monthly ration of $99B in 2-Year, 5-Year and 7-Year Notes.  The Eurozone of course is always in play these days and any significant comments from leaders of the EU, ECB and IMF will get traders’ attention.  Technically, the bond and mortgage markets, after last week’s selling, are now slightly bearish.  We talked about how the rate markets were losing momentum for the past two weeks, the break came last week.

“How high will interest rates climb” is the question now facing investors and traders.  We don’t believe rates will increase much, at worst the 10-Year Note could increase to 2.15% but should hold.  On the opposite side, it is very likely that the lows in rates have been put in place.  As long as the U.S. economic outlook is improving and there are no actual defaults in any Euro debt, there is little reason to justify the 10-Year Note going below 2.00% and mortgage rates at their lows of a few weeks ago.

Europe’s finance ministers are meeting today in Brussels,trying to advance plans to craft a long-term plan to tackle the region’s debt crisis, as banking and government negotiators continue trying to reach an agreement that will lighten Greece’s debt burden.  There has been progress over the past couple of weeks where Greece and private bondholders said they made progress in talks over the weekend in Athens.  Finance Minister Evangelos Venizelos said before today’s meeting that Greece is prepared to wrap up the private-sector debt swap on schedule.  “We have a very constructive cooperation with the private sector,” Venizelos told reporters in Brussels.  “We are ready to finalize the procedure on time.”

This Week’s Calendar:

01/24/12: 0100pm $35 billion of 2-Year Note Auction

01/25/12: 0700am MBA mortgage applications

1000am December Pending Home Sales (-1.0%)

November FHFA Housing Price Index (-0.1%)

0100pm $35 billion of  5-Year Note Auction

0215pm FOMC policy statement

01/26/12: 0830am Weekly Jobless Claims (+23K back to 375K)

December Durable Goods Orders (+2.2%, ex auto sales +0.7%)

1000am December New Home Sales (+1.5% to 320K units (annualized)

December Leading Economic Indicators (+0.7%)

0100pm $29 billion of 7-Year Notes Auction

01/27/12: 0830am Q4 Advance GDP (+3.1%)

0955am Universtiy of Michigan Consumer Sentiment Index (74.2 from 74.0)

The bond and mortgage markets have been losing strength for two weeks as indicated in past commentary.  The 10-Year Note won’t find much support until it hits 2.15% (now at 2.09%).  There aren’t many momentary concerns to hold treasuries against Europe.  U.S. economic outlook is improving thereby removing another support forrates.  There is some talk that the Federal Reserve may announce it will increase purchases of mortgageBacked Securities (MBS) to keep mortgage rates low, but as long as Treasury rates increase the best we can expect is that mortgage rates won’t increase as much, but will increase.  While we do not expect rates will fall again to the recent lows we are equally not expecting rates to move radically higher.

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The rate markets started a little weaker early this morning; at 830am two data points brought the treasury andmortgage markets back to unchanged.  Weekly Jobless Claims were expected up 3K to 375K, as reported claims jumped 24K to 399K; Continuing Claims up 19K, the 4-week average is at 381,750 from 374K last week.  December Retail Sales were expected up 0.3%, as reported were up +0.1%, excluding autos and trucks was expected up 0.4%, as reported down 0.2%.  Retail Sales were the weakest since last May.  Two reports that should dampen the outlook for increased growth of the economy didn’t have the impact we would have thought.  Prior to the 830am reports the DJIA futures were trading up +70, at 915am was up +22; the 10-Year Note prior to 830am was down -7/32 but at 915am was up +1/32.  mortgage prices were unchanged at 915am.

At 930am the DJIA opened up +15, the 10-Year Note slipped down to -1/32 at 1.91% (unchanged) and MBS prices were unchanged.  The U.S. markets are ignoring the weak Retail Sales and increase in Unemployment Claims in favor of the constant and inconsistent news out of Europe.  Yesterday there were reports that Germany’s economic outlook was worsening with manufacturing slowing and talk that Europe would fall back into recession.  This morning European Central Bank President Mario Draghi said there are some signs the euro-area economy is stabilizing even as the sovereign debt crisis poses risks to the outlook.  “According to some recent survey indicators, there are tentative signs of stabilization of economic activity at low levels,” Draghi said at a press conference in Frankfurt today after the ECB kept its benchmark interest rate at 1% following two straight reductions.  “The economic outlook remains subject to high uncertainty and substantial downside risks,” he added.

Spain and Italy successfully sold notes this morning.  Spain auctioned 9.98 billion euros ($12.7 billion) of bonds maturing in 2015 and 2016, including a new 3-year Note benchmark security, twice the maximum target of 5 billion euros set for the sale.  The yield on the 3-year Note was 3.384%, compared with 5.187% when the nation sold similar notes in December.  Italy sold 12 billion euros of Treasury bills, meeting its target, and its borrowing costs plunged.  The Rome-based Treasury sold 8.5 billion euros 1-year Notes at a rate of 2.735%, down from 5.952% at the last auction.  The auctions were stronger than expected providing a razor thin idea that Europe’s debt issues may be waning; an idea completely wrong, Europe is headed for default and in our view another recession, the second in the last three years. That said, there isn’t any strong conviction regardless of ones outlook for Europe.

At 1000am, November Business Inventories, expected up 0.4%, were up 0.3%; sales were up 0.3%; the inventory to sales ratio was unchanged from October at 1.27 months.  There was no reaction to the report.

Next up today; at 100pm the Treasury will auction $13B of 30-Year Bonds, re-opening the 30-Year Bond issued in November. The 10-Year Note auction yesterday and the 3-Year Note auction Tuesday saw good demand, likely the 30-Year Bond will also.

At 200pm the Treasury will report the December Deficit, expected to be down -$79.0B.

Will interest rates continue to fall?  It’s difficult to handicap the outlook given the mess in Europe.  So far the technical data are holding but losing a lot of momentum with investors and to some extent with traders.  On recent rallies the 10-Year Note has not declined to its previous lows, on selling it hasn’t increased more than previous selling bouts.  A coiling spring with the trading range narrowing each day suggests a breakout is coming but the direction yet to be determined.  The outlook for the U.S. economy is has ratcheted up since there hasn’t been any new shocks out of Europe’s banking and credit crisis, keeping the bond and mortgage markets in narrow ranges.  Safety trades into treasuries is waning however traders and investors are reluctant to sell U.S. treasuries.

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The market was a little better at the start today; at 830am the 10-Year Note was up +7/32 at 1.94% (-2 bps) from yesterday’s close.  The 10-Year Note once again tested and held the key 2.00% level yesterday and based on closes there was no movement in the bond market and MBSs were also relatively unchanged.  Equity markets in Europe are weaker this morning.  The U.S. indexes prior to the open were slightly weaker.  U.S. interest rateshave been generally unchanged for over a week now; Europe’s debt problems keeping a minor bid in U.S. treasuries while improved economic outlooks are weighing on the markets.  A balance between the two forces has stabilized rates for the moment. 

There is no economic data this morning.  At 200pm this afternoon the Federal Reserve will release its Beige Book.  At 100pm the Treasury will auction $21B of 10-Year Notes.  Yesterday’s 3-Year Note auction went well with decent demand.  Chicago Federal Reserve President Charles Evans on CNBC this morning saying the economic outlook is brightening but is still soft enough to need central bank support and added that the recent data isn’t strong enough or uniform enough to assert momentum is increasing.  Evens is a hawk and one of the most vocal Federal Reserve officials calling for aggressive stimulus actions.  Evans isn’t concerned about inflation and wants the Federal Reserve to tolerate increased inflation, possibly as high as 3.0%.  Inflation fears are way over-done in terms of concern, there is no pricing power and it won’t be surfacing for quite a while. 

News out of Europe this morning; Germany’s economy may be faltering.  German  Stocks slipped after a report showed that the debt crisis caused the economy to contract 0.25 percent in the fourth quarter from the third.  Growth slowed to 3 percent in 2011, the Federal Statistics Office in Wiesbaden said in an unofficial estimate.  Economists including Christian Schulz at Berenberg Bank expect gross domestic product to contract again in the current quarter.  A recession is defined as two consecutive quarters of declining GDP.  After yesterday’s biggest rally in a week a report showed that Europe’s largest economy contracted in the final quarter of 2011, indicating it may be headed for a recession.  Confusion and uncertainty continue to dominate; one day a strong rally, the next talk of recession in Germany’s future.  It is no wonder that markets are essentially frozen with interday volatility with not much change when viewed over a longer period. 

At 930am the DJIA opened down -50, the 10-Year Note opened up +7/32 at 1.94 (-2 bps) and MBS prices opened up +1/32 (.03 bp).

mortgage applications increased 4.5 percent from one week earlier, according to data from the mortgageBankers Association’s (MBA) Weekly mortgage Applications Survey for the week ending January 6, 2012.  The results include an adjustment to account for the New Year’s Day holiday.  The Market Composite Index, a measure of mortgage loan application volume, increased 4.5 percent on a seasonally adjusted basis from one week earlier.  On an unadjusted basis, the Index increased 34.4 percent compared with the previous week.  Therefinance Index increased 3.3 percent from the previous week.  The seasonally adjusted Purchase Index increased 8.1 percent from one week earlier.  The unadjusted Purchase Index increased 41.9 percent compared with the previous week and was 17.9 percent lower than the same week one year ago.  The refinance share ofmortgage activity decreased to 80.8 percent of total applications from last week’s survey high of 81.9 percent.  The adjustable-rate mortgage (ARM) share of activity increased to 5.4 percent from 4.7 percent of total applications from the previous week.  The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 4.11 percent from 4.07 percent, with points decreasing to 0.41 from 0.53 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.  The effective rate also increased from last week.  The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $417,500) decreased to 4.34 percent from 4.41 percent, with points increasing to 0.47 from 0.44 (including the origination fee) for 80 percent LTV ratio loans.  The effective rate also decreased from last week.  The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA remained unchanged at 3.96 percent, with points increasing to 0.72 from 0.71 (including the origination fee) for 80 percent LTV ratio loans.  The effective rate also remained unchanged from last week.  The average contract interest rate for 15-year fixed-rate mortgages increased to 3.40 percent from 3.37 percent, with points decreasing to 0.37 from 0.50 (including the origination fee) for 80 percent LTV loans.  The effective rate also decreased from last week.  The average contract interest rate for 5/1 ARMs decreased to 2.90 percent from 2.91 percent, with points increasing to 0.49 from 0.48 (including the origination fee) for 80 percent LTV ratio loans.  The effective rate also decreased from last week. (mortgage Bankers Assoc).

The euro weakened for the first time in three days against the dollar and the yen as Fitch Ratings added to concern that the region’s debt crisis will spread.  The euro slid versus 14 of its 16 most-traded counterparts after Fitch’s head of sovereign ratings, David Riley, said the European Central Bank should boost bond purchases to avert a collapse of the shared currency.  The bank meets tomorrow.  German data showed the region’s largest economy may be on the brink of recession.  The rating agencies these days don’t just rate debt, they now are saying what banks and central banks should do.  Rating agencies screwed up the sub-prime mess and were instrumental in sending the global economy into a long term slowdown.

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U.S. Treasury rates increased this morning taking the 10-Year Note to its key technical and psychological level of 2.00% at 800am this morning.  Stock indexes were higher indicating a strong open after equity markets in Europe improved.  The MBS market is a little weaker but continues to hold steady against treasuries. The Treasury begins this week’s auctions today at 100pm with $32B of 3-Year Notes, tomorrow $21b of 10-Year Notes and Thursday $13B of 30-Year Notes.  Two weeks ago the Treasury sold $99B of 2-Year Notes, 5-Year Notes and 7-Year Notes; none of the auctions met with the strong bidding that had been the case for the past few months.

Europe still has major influence in U.S. markets, however for the present the worries over defaults and safe haven moves into U.S. treasuries has waned somewhat.  The 10-Year German bond underperformed as all their euro-area peers European stocks rose, curbing demand for the safest fixed-income assets.  Angela Merkel said yesterday that euro-area nations are considering accelerating capital contributions to the region’s bailout fund.  French bonds rose after Fitch Ratings said the nation will probably retain its credit grade unless the European debt crisis worsens.  Merkel will meet IMFs Lagarde today after discussions with French President Nicolas Sarkozy yesterday.  The leaders said they plan to drive forward their agenda for stricter budget rules as they seek to craft a master plan for rescuing the euro. 

French business confidence climbed from a two-year low last month and industrial output increased in November,indicating the threat of a recession in the euro-region’s second-biggest economy is easing.  The numbers suggest that France may be able to skirt a deep recession as European leaders impose austerity measures to contain the region’s sovereign-debt crisis.  The confidence reading suggests French gross domestic product will stall and not shrink in the fourth quarter, the Bank of France said today. 

At 930am the DJIA opened up +110, the 10-Year Note sat at 2.00% and mortgage prices were down 3/32 (.09 bp). 

The only data today is November Wholesale Inventorieswhich was expected up +0.5%, reported up 0.1%, sales up 0.6% with a 1.15 month inventory to sale ratio.  No reaction to the data. 

This morning the 10-Year Note at 2.00%, in previous moves to 2.00% the 10-Year Note has managed to hold and not push above it.  Although many analysts and Wall Street firms are improving their forecasts for the U.S. economy this year, and some are actually recommending moving out of fixed income treasuries, the bond and mortgage markets have so far been able to resist moving higher in rates.  As noted yesterday, the technical momentum oscillators are weakening; the 20-day average today is at 1.99% and so far holding.  The bond market is losing momentum, if the 10-Year Note breaks and holds above 2.00% it will likely test 2.04%; as long as that level holds the outlook will continue to project lower rates.  A move over 2.04% will signal the end to the move projecting the 10-Year Note back to 2.25%.  Europe plays a significant role as does the U.S. equity market.

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]]> http://crestico.wordpress.com/2012/01/10/market-update-for-tuesday-01-10-2012/feed/ 0 crestico http://crestico.wordpress.com/2012/01/09/market-update-for-monday-01-09-2012/ http://crestico.wordpress.com/2012/01/09/market-update-for-monday-01-09-2012/#comments Tue, 10 Jan 2012 04:13:27 +0000 CRESTICO http://crestico.wordpress.com/?p=354 ]]>

It’s all quiet this morning but a still little soft on prices;the stock market indexes a little better.  Germany’s Merkel and France’s Sarkozy are meeting today; nothing but talk however.  The talks are centered on how to save the euro currency from declining further.  This morning the euro is slightly better this morning.  Greece’s struggle to contain its debt is a “special case” and no country must leave the euro, German Chancellor Angela Merkel told reporters after meeting with French President Sarkozy in Berlin.  Additional meetings are planned before the next summit scheduled on Jan 30^th in Brussels.  The two leaders have sponsored a plan to draw up new fiscal guidelines by March to resolve a crisis that began in Greece more than two years ago.  As the contagion moves to the euro-area’s core, policy makers are struggling to persuade investors they can contain the risk and assure the single currency’s survival.

There are no economic releases scheduled today.  Trade will be driven by how the U.S. stock market acts.  In Europe the various stock markets are not moving much.  This week is light on data with most coming later in the week.  The Treasury will auction $66B in notes and bonds beginning tomorrow.  The Obama Administration is preparing a plan to try and unload foreclosed properties held by Fannie, Freddie and FHA.  The plan calls for packaging bundles of REOs with the goal of selling blocks of homes to private investors as income properties (rentals).  It is a plan that has been kicked around for a while but until now, only talk.  Every key agency from the Federal Reserve to FHFA appears to be involved with the plan.  Rental income is up and prices for homes are still falling.  If the prices are right maybe some of the REOs can be sold.  This depends mostly on how much the agencies are willing to give up when prices are set.  There is little reason to expect the plan will be successful, but it’s worth a try; what lender will step up to finance a huge pool of foreclosed houses without a huge infusion of up-front cash?

Today begins Q4 earnings reports with Alcoa leading the way as usual.  Traders are expecting somewhat more positive guidance from key companies.  Equity markets this week will be driven by the data as well as Europe’s travails.

This Week’s Economic calendar:

01/09/12: 0300pm November Consumer Credit (+$7.0B).

01/10/12:  1000am November Wholesale Inventories (+0.5%).

0100pm $32B 3-Year Note Treausry Auction.

01/11/12:  0700am Weekly MBA mortgage Applications.

0100pm $21B 10-Year Note Treasury Auction.

0200pm Federal Reserve Beige Book.

01/12/12:  0830am Weekly Jobless Claims (+3K to 375K).

December Retail Sales (+0.4%; ex auto sales +0.4%).

0100pm $13B 30-Year Bond Auction.

0200pm December Treasury Budget (-$79.0B).

01/13/12:  0830am November Trade Balance (-$44.3B).

December Export and Import Prices (N/A).

0955am University of Michigan Consumer Sentiment Index (71.0 frm 69.9).

At 930am the DJIA opened up +11; the 10-Year Note was down -2/32 at 1.96% and mortgage prices at 9:30 +1/32 (.03 bp).

The charts continue to hold a positive bias, however there have been no real changes in interest rates for weeks,  Prices are tied to a tight range awaiting more substantial news from Europe.  The U.S. economic outlook has improved based on various economic releases over the last couple of months. U.S. markets wrestling with whether the U.S. can grow much with Europe headed for a deeper recession.  Trade today will be no different than we have seen over the last couple of months, if stock indexes decline rate markets should hold and improve, a rally in equities will pressure rate markets.  Either way, we are not expecting much change by the end of the day.

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